Chapter 5

Reporting Profit or Loss in the Income Statement


Looking at typical income statements

Being an active reader of income statements

Asking about the substance of profit

Handling out-of-the-ordinary gains and losses in an income statement

Correcting misconceptions about profit

In this chapter, I lift up the hood and explain how the profit engine runs. Making a profit is the main financial goal of a business. (Not-for-profit organizations and government entities don’t aim to make profit, but they should break even and avoid a deficit.) Accountants are the profit scorekeepers in the business world and are tasked with measuring the most important financial number of a business. I should warn you right here that measuring profit is a challenge in most situations. Determining the correct amounts for revenue and expenses (and for special gains and losses, if any) to record is no walk in the park.

Managers have the demanding tasks of making sales and controlling expenses, and accountants have the tough job of measuring revenue and expenses and preparing financial reports that summarize the profit-making activities. Also, accountants are called on to help business managers analyze profit for decision-making, which I explain in Chapters 12 and 13. And accountants prepare profit budgets for managers, which I cover in Chapter 14.

This chapter explains how profit-making activities are reported in a business’s external financial reports to its owners and lenders. Revenue ...

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